Forget the politics – buy cheap European stocks

The Henderson Euro Trust finds value in European stocks, says Max King.


The Henderson Euro Trust finds value in Continental equities, says Max King.

"There is an implicit assumption among investors that membership of the EU and adoption of the euro currency are good for a country's equity markets," says Brian Chingono of Verdad Capital. Hence good equity performance in Europe last year was widely attributed to a pick-up in growth and greater political stability. This year, negative performance by the MSCI Europe ex-UK index, and 25 straight weeks of fund outflows, have been blamed on a weakening economy and fears of instability.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Verdad's analysis, however, shows an annualised return of 8.4% between 1994 and 2017 from the equities of EU members, and 9.8% from non-EU members. The returns from the former broke down to 8.1% for those that adopted the euro currency and 9.4% for those that didn't. While this implies that membership of the EU, and especially adoption of the euro, were actually negative for market returns, Chingono notes that the differences are not statistically significant. "Investors should spend less time thinking about political unions and single currencies and more time focused on finding cheap equities."

This is just the way Tim Stevenson, manager of the £266m Henderson Euro Trust (LSE: HNE), thinks. "I hate the macro and having to talk about it," he says. "I prefer to talk about stocks." He has managed the trust since its launch in 1992, returning a compound 14.5% (with dividends reinvested) in sterling, compared with a sector average of 12.9% and 9.9% for the benchmark. Moreover, performance has been ahead of benchmark over one, three, five and ten years, as well as over 25. The shares, nonetheless, trade on a 9% discount to net asset value and yield 2.3%.

Advertisement - Article continues below

Plenty of opportunities

This year Europe has lagged, despite better economic performance over the past few years. It has a mature economy, which means 1.5% to 2% growth is really good, but there are still plenty of investment opportunities, says Stevenson. He has no doubt that valuations have been held back. "The unstable alliance in Italy has warned off investors for now, but... the problem is sentiment rather than fundamentals."

This is backed up by Stevenson's estimate of 14.9% earnings growth on 5.4% revenue growth for the coming year, both slightly ahead of the index. The three-year historic averages are 14.5% and 5.8%, comfortably ahead of the index. Turnover of the 46-stock portfolio, at around 45% but more this year, is fairly active. Stevenson is looking for companies with organic sales growth of 3% to 4%, plus the potential for bolt-on acquisitions and margin improvement. With a 2% dividend yield, this means a target return of roughly 10% less than achieved in the past, but still considerable.

A global focus

Many of the companies have a global rather than a European focus. Inditex, the Spanish owner of retailer Zara, is seeing 4% like-for-like sales growth in euros, and just 17% of its sales come from Spain. Deutsche Post delivers mail and parcels in Germany but also owns DHL, which has 45% of the market for express deliveries and associated logistics in Asia.

The portfolio also includes world-leading tech firms such as B2B software producer SAP, semiconductor company ASML and travel technology business Amadeus, as well as DSM, a former industrial conglomerate restructuring its business, and Amundi, one of Europe's top fund management firms. Long-term savings is a huge growth market, yet the latter's shares are priced on just 12-13 times earnings and yield 4%.

Stevenson doesn't look at the country breakdown of the portfolio as "it tells me nothing". Investors should follow his and Chingono's lead ignore the politics and buy into a cheap market.



Investment trusts

If you think now is a good time to buy, look at these investment trusts

With the latest market slides, an awful lot of assets are beginning to look very cheap indeed. If you are thinking of buying, Merryn Somerset Webb has…
10 Mar 2020

How to build a properly diversified investment trust portfolio

Max King explains how to build a well diversified portfolio using one of our favourite tools – investment trusts.
25 Feb 2020

Why investment trusts are the best vehicle for your money

Max King explains the advantages of investment trusts – sometimes called closed-ended funds – over their open-ended counterparts (or Oeics).
11 Feb 2020
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020

Most Popular


Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020

Oil shoots higher – have we seen the bottom for the big oil companies?

Just a few days ago everyone was worried about negative oil prices. Now, the market has turned upwards. John Stepek explains what’s behind the rise an…
3 Apr 2020
UK Economy

How the coronavirus pandemic is killing cash

Covid-19 is making a huge difference to the way we live, work and do business. One of its less obvious effects, says Merryn Somerset Webb, is to accel…
31 Mar 2020